The U.S. Solicitor General has recommended the Supreme Court not review RJR Pension Investment Committee v. Richard Tatum.
Last December, the 4th Circuit Court of Appeals overturned a district court and ruled in favor of participants in the R.J. Reynolds defined contribution plan, who alleged that company fiduciaries prematurely liquidated company stock.
The original claim in the so-called “reverse stock drop” case originated from R.J. Reynolds’s decision to divest its holdings in Nabisco stock, the company that formerly owned RJR, in 1999, after R.J. Reynolds was spun off from Nabisco.
Participants were forced to sell their stock at an all-time low for Nabisco. A year later the stock had jumped to an all-time high.
That proved a fiduciary breach, argued the plaintiffs. But the U.S. District Court for the Middle District of North Carolina ruled that a prudent fiduciary “could have” made a similar decision to sell the stock, relieving RJR of liability, even though the court did find RJR’s fiduciaries to be procedurally negligent.
However, the 4th Circuit found differently, ruling in a 2 to 1 split decision that a fiduciary can be held liable for losses from an investment decision, even if the decision was “objectively prudent,” according to court documents.
The appellate court also ruled that the burden of proving the prudence of the fiduciaries’ decision to sell the stock falls on the fiduciaries and not the participants.
That ruling “deepened a well-documented circuit split over which party bears the burden of proof on loss causation,” wrote RJR attorneys when they petitioned the Supreme Court to review the case.
In previous ERISA cases involving investment losses, five circuits have held the burden of proving losses is always the plaintiffs, whereas the 5th and 8th Circuits have ruled that the burden of proof falls to fiduciaries when they are alleged to have breached their duties.
In their brief to the Supreme Court, the plaintiffs argued RJR “made a divestment decision that cost its employees millions of dollars with virtually no discussion or analysis,” and that the 4th Circuit found that the “extent of procedural imprudence shown here appears to be unprecedented in a reported ERISA case,” according to papers plaintiffs filed to the Supreme Court.
In its recommendation to the Supreme Court, the Solicitor General argued the court of appeals accurately ruled that RJR bore the burden of proving that its failure to conduct an adequate investigation before selling the stock did not cause losses to participants.
Long-standing trust law places that burden of proof on fiduciaries, not plaintiffs, argued the Solicitor General.
As such, the case doesn’t merit the Supreme Court’s attention, argued the Solicitor General.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
